Homework 1 Inv Analysis

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Rutgers University *

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390:380

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Finance

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Jan 9, 2024

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Homework 1 Question 1 : What are the variables that constitute TRUE investing? Time, Risk, Uncertainty, Expertise Question 2 : What is the difference between risk and uncertainty? Risk is something where probabilities can be estimated while with uncertainty you cannot calculate probabilities. With risk there is narrow range of outcome as compared to the wide range of unknown outcomes with uncertainty. Question 3 : What are the proposed tools for hedging against risk? There are lot of tools for hedging against risk. Some of the common ones are portfolio diversification, stop-loss orders, derivatives, insurance, swaps, future, option and forward contract. Question 4 : Which uncertainties we are most concerned with an analyst and or investor? Some of the common uncertainties that investors and analyst are concerned about is economic condition, global problems like trade war or political issues, big events like natural disaster or health crises. Question 5 : How to manage an ontological uncertainty in investment? Diversifying your portfolio is one way to help reduce the risk of uncertainties. Maintaining a decent amount of liquidity can help manage ontological uncertainty. Question 6 : From the perspective of the company’s founders. What is the advantage and disadvantage of IPO's? I am going to start off by few of the advantages of IPO’s. One of the most important thing would be the gain of capital from offering IPOs. It also helps with brand visibility. As a founder of the company, I can make good money by selling my shares. The major disadvantage of IPO is less influence over the company. The cost of going public can be significant as well. Question 7 : The success of IPO usually impacted by endogenous and exogenous variables, Explain? The success of IPO usually depends on both endogenous and exogenous variable. The reason why is because endogenous variables are internal factory that a company and its management team can directly control like the financial health of the company or the performance of management team itself. Favorable exogenous variables are also extremely importance

because they can have a significant impact on the IPO as well. For example market condition would be considered exogenous variable and if it’s not in your favor, chances are the IPO will not succeed. Question 8 : IPO Firm commitment Underwriting, may have an inherent systematic risk to underprice explain? In what circumstance founder may be OK with it? IPO firm commitment underwriting can sometimes lead to underpricing in order to attract new investors. Founder may be okay with if they want to raise capital quickly, gain positive market perception, and reduce post-IPO stock price volatility. Question 9 : If you are an analyst, valuing an IPO the proposed use of the proceeds should impact your valuation. Explain? If I am valuing an IPO its true that the proposed use of proceeds should impact your valuation because the investors can learn if the company’s plan matches its long term goal. It also create transparency so that investors can be more confident. All this can reduce the risk of underpricing. Question 10 : Under Dutch auction IPO 's underwriting, when does allocation issue come to play? And why does it matter? Dutch auction IPO occurs after determining the clearing price and involves distributing shares among investors. It matters because it affects fairness, capital raised, investor satisfaction, price stability, and regulatory compliance. Question 1 (Textbook) Limit Buy Order: A limit buy order is where you buy share but only at or below a specific price, which is your limit price. Limit Sell Order: A limit sell order is where you sell share but only at or above a specific price, which is your limit price. Market Order: A market order is where you buy or sell share at the market price which will be what a buyer is willing to pay or what a seller is willing to sell for regardless of what your desired price is. Question 4 (Textbook) A) An investor who wishes to sell share immediately should ask his or her broker to enter a limit order.

FALSE, if someone wants to sell their share immediately than they must sell it at market price. B) The ask price is less than bid price. FALSE, bid price is always going to be less than ask price because bid price is what a buyer wants to pay and ask price is what the seller wants to sell at. C) An issue of additional shares of stock to the public by Microsoft would be called an IPO. FALSE, IPO is Initial Public Offering. In this case additional shares of stock issued to the public by Microsoft is called Seasoned Equity Offering. D) An ECN (electronic communications network) is a computer link used by security dealers primarily to advertise prices at which they are willing to buy or sell shares. TRUE Question 13 (Textbook) A) You have placed a stop-loss order to sell at $70. What are you telling your broker? When you place a stop-loss order to sell the stocks at $70, you are telling your broker that if the market price of the stock drops to or below $70 per share they should sell the stock automatically. B) Given market prices, will your order be executed? In this case your order will be executed because the market price is $69.95, which is less than $70. Question 14 (Textbook) A) Suppose you have submitted an order to your broker to buy at market. At what price will your trade be executed? If you submitted an order to buy at market, your trade will be completed at the current ask price $55.50, which is what the seller is willing to sell it at. B) Suppose you have submitted an order to sell at market. At what price will your trade be executed? If you submitted the order to sell the stock right now, your trade will be completed at the bid price $55.25, which what a buyer is willing to pay for it.

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C) Suppose you have submitted a limit order to sell at $55.62. What will happen? If you submit limit order to sell at $55.62, you stock would only be sold if the market price of the stock rises to or above $55.62. D) Suppose you have submitted a limit order to buy at $55.37. What will happen? If you submit a limit order to buy at $55.37, your stock would only be sold if the market price of the stock drops to or below $55.37.